BEPS and ATAD: Where do we stand?

by Nicky Gouder

Tax Partner

Summary

• Quick Overview of the BEPS Project and ATAD;

• A Comparison of the BEPS Recommendations and the

ATAD – obstacles, conflicts. Is harmonious

implementation possible?;

• Implementation issues;

• Is CCTB/CCCTB really the next step?

BEPS Project – Why?

• Global Corporate Income Tax (CIT) revenue losses

estimated between 4% - 10% of CIT revenues ($100b -

$240b)

• “The affiliates of MNEs in low tax countries report

almost twice the profit (relative to assets) of their global

group..” – OECD/G20 Explanatory Statement;

• “BEPS arises because under the existing rules MNEs

are often able to artificially separate the allocation of

their taxable profits from the jurisdictions in which these

profits arise” – OECD Webinar

What is the BEPS Project?

• The main BEPS project objective: “profits are taxed where economic activities take place and value is created”;

• “to prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from activities that generate it.”

• OECD and G20 counties (+) recommendations through 15 Action Plans to prevent beps

What is the BEPS Project?

• Substance, substance and more substance

BEPS Action Plans

Action 1:

Address the

challenges of the

digital economy

Action 2:

Neutralise the

effect of hybrid

mismatch

arrangements

Action 3:

Strengthen CFC

rules

Action 4:

Limit base erosion

via interest

deductions and

other financial

payments

Action 5:

Counter harmful

tax practices more

effectively, taking

into account

transparency and

substance

Action 6:

Prevent treaty

abuse

Action 7:

Prevent the

artificial avoidance

of PE status

Action 8:

Assuring that TP

outcomes are in

line with value

creation Intangibles

Action 9:

Assuring that TP

outcomes are in

line with value

creation (Risks &

Capital)

Action 10:

Assuring that TP

outcomes are in

line with value

creation (Other

high-risk

transactions)

Action 11:

Establish

methodologies to

collect and analyse

data on BEPS and

the actions to

address it

Action 12:

Require taxpayers

to disclose their

aggressive tax

planning

arrangements

Action 13:

Guidance on

transfer pricing

documentation and

Country-by-

Country reporting

Action 14:

Make dispute

resolution

mechanisms more

effective

Action 15:

Develop a

multilateral

instrument

AP 2 - Hybrid Mismatch Arrangements

Recommendation : Denial of

exemption in State A.

If State A doesn’t apply the

recommendation, State B

denies the deduction of

interest payment.

AP 5 – Preferential IP regimes

Recommendation:

“Nexus approach” –

allows a taxpayer to

benefit from an IP regime

only to the extent that

such taxpayer incurred

qualifying R&D

expenditure relating to

the royalty income it is

receiving.

AP 6 – Granting Treaty Benefits in

Inappropriate circumstances.

Is B Co really the Beneficial

owner of the dividend

income or has it been set

up simply to benefit from

the B-C and A-B Treaties?

Recommended Changes to

the OECD Model Tax

Convention;

‘Beneficial Owner’ concept;

BEPS Implementation

• Via changes in domestic law and practices;

• Via treaty provisions;

• Via Changes to the Commentaries to the OECD

Model;

• Via the Multi Lateral Instrument (MLI).

AP 15 – Multilateral Instrument

• The preferred vehicle to implement BEPS APs;

• More than 100 jurisdictions have concluded

negotiations on the MLI;

• Jurisdictions have prepared their list of treaties to

be covered by the MLI (options and reservations);

• Does this provide the necessary flexibility or could

this lead to a potential nightmare?

http://www.oecd.org/tax/treatie

s/mli-matching-database.htm

EU Anti Tax Avoidance Directive

(ATAD)

Background

• 28 January 2016 - the European Commission (EC) released a proposal for a Council Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market (COM(2016) 26 final);

• Unanimity on the proposal was never achieved and a number of amendments were proposed;

• 12 July 2016 - compromise text was adopted as Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.

Background

• July text doesn’t include the Switch Over Clause

• Applicable from 1 January 2019

• ATAD II amending ATAD– on the 29 May 2017, the

Council adopted ATAD II. Member States must transpose

the Directive by 1 January 2020.

Specific Provisions

• Interest limitation;

• Exit taxation;

• General anti-abuse;

• Controlled foreign company; and

• Hybrid mismatches.

Implementation

• Implemented as of 1 January 2019, with two derogations:

• the Exit Tax rule is to be implemented as of 1 January

2020;

• MS which on 8 August 2016 have equally effective

rules as the interest limitation rule may apply these

until the end of the first full fiscal year following the

date of publication of the agreement between the

OECD members on a minimum standard, but at the

latest until 1 January 2024.

Interest Limitation Rule

Interest Limitation Rule

• Interest expense in excess of interest income (exceeding

borrowing costs) may only be deducted up to 30% of

EBITDA

• Tax exempt income shall be excluded from the EBITDA

Interest Limitation Rule

By derogation, the taxpayer may be given the right to:

• Deduct exceeding borrowing costs by Eur3m;

• Fully deduct exceeding borrowing costs if the tax payer is a

standalone entity;

• Exclude exceeding borrowing costs on loans concluded

before 17/06/16;

• Exclude exceeding borrowing costs on loans used to fund

long-term public infrastructure projects.

Interest Limitation Rule

Consolidated Groups

By derogation, the taxpayer may be given the right to:

• Fully deduct exceeding borrowings costs if it can

demonstrate that its equity/ total assets ratio is equal to, or

higher than, the equivalent group ratio;

• To increase the limitation of exceeding borrowing costs to

the following:

Group Exceeding 3rd party Borrowing Costs X Taxpayer EBITDA

Group EBITDA

Exit Taxation

Tax shall be charged on an amount equal to the MV of the

asset, at the time of exit, less their value for tax purposes, in

the following scenarios:

• Transfer of assets from HO to PE (EU or TC);

• Transfer of assets from PE to HO/PE (EU or TC);

• Transfer of residence (to EU or TC);

• Transfer of a PE Business (to EU or TC).

Exit Taxation

Transfer of assets from HO to PE (EU or TC)

ASSET

HO

MS 1

PE

MS2 / TC

“The MS of the HO no

longer has the right to

tax the transferred

asset due to the transfer

”

Ownership remains with

the same tax payer.

Exit Taxation

Transfer of assets from PE to HO/PE (EU or TC)

HO

PE PE

ASSET

MS 1/ TCMS 3/ TC

MS 2

Exit Taxation

Transfer of residence (to EU or TC)

TP

MS 1 MS2 / TC

TP

Exit Taxation

Transfer of a PE Business (to EU or TC).

HO

MS 1 MS2 / TC

PE

MS3 / TC

General Anti-Abuse Rule (GAAR)

• MS shall ignore an arrangement or series of, which have

been put into place for the main purpose or one of the

main purposes of obtaining a tax advantage that defeats

the object or purpose of the applicable tax law; or

• Are not genuine, that is, are not put in place for valid

commercial reasons which reflect economic reality;

• In such cases, the tax liability shall be calculated in

accordance with national law.

Controlled Foreign Company Rule

(CFC)

Controlled Foreign Company Rule

(CFC)

• MS must tax the income of an entity or PE which is

deemed a CFC

Controlled Foreign Company Rule

(CFC)

What is a CFC?

Where a TP (by itself, or together with its associated enterprises)

holds a direct or indirect participation of more than 50% of:

• Voting Rights; or

• Capital; or

• Entitlement to profits.

‘Associate enterprises’ – connected as to 25% VR, Capital or Profits.

Controlled Foreign Company Rule

(CFC)

TP

MS 1

MS2 / TC

CFC

> 50% VR, Capital or Profits

Controlled Foreign Company Rule

(CFC)

AND…..

• The actual corporate tax paid is lower than the difference

between the corporate tax that would have been charged

under the corporate tax system in the MS and the actual

corporate tax paid.

• The income will not be taxed in the CFC carries on a

substantive economic activity supported by staff,

equipment, assets and premises

Hybrid Mismatches

• To the extent that a hybrid mismatch results in a double

deduction – the deduction shall be given only in the MS

where such payment has its source;

• To the extent that a hybrid mismatch results in a deduction

without inclusion, the MS of the payer shall deny the

deduction.

Hybrid Mismatches – Proposed

ATAD II

On 27 April 2017, the European Parliament adopted a

legislative resolution amending ATAD to address hybrid

mismatches involving 3rd countries:

• Hybrid entities;

• Hybrid PEs;

• Hybrid transfers;

• Imported mismatches;

• Dual resident mismatches.

Is the CCTB and the CCCTB the

next step?

October 2016 – EU Proposal

CCTB – Common Corporate Tax Base – one set of rules to

calculate taxable profit – 1 January 2019;

CCCTB – Common Consolidated Corporate Tax Base –

Allocation of profits based on labour, assets, turnover – 1

January 2021

Concluding Remarks

• BEPS implementation via the MLI;• Exit tax rule compatibility with EU freedoms is

questionable;• ATAD Contains principle based rules and leaves the

details of their implementation to the MS – could this create an issue with harmonization?;

• Whilst being EU’s response to the BEPS Project – some APs are not implemented in the Directive (1, 8, 9, 10 and 12) and the exit tax article is not mentioned in the BEPS’ APs;

• Differences between what is proposed at OECD and EU level – how will this work?

“The limits of the possible can only be defined

by going beyond them into the impossible”

Arthur C. Clarke

Thank you